Best Chattel Mortgage Options
- A chattel mortgage is a business loan that uses the asset being purchased by the borrower as security (collateral)
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What is a chattel mortgage?
A chattel mortgage is a type of secured business finance commonly used to buy vehicles and other business equipment. With a chattel mortgage, the asset being purchased (known as the ‘chattel’) is registered as security for the loan.
This means the lender has the ability to reclaim the asset if the borrower cannot repay the loan. However, under a chattel mortgage the business has full ownership of the asset from the beginning.
Chattel mortgages are commonly used by sole traders and businesses, often due to the significant financial advantages they offer over a standard car loan. To qualify, the vehicle must be used at least 51% of the time for business.
How do chattel mortgages work?
Chattel mortgages are fixed-term finance contracts with a fixed interest rate. In this sense they are similar to secured car loans, but for business customers. Here’s what happens if you’re approved for a chattel mortgage:
- A lender will provide the funding needed to purchase the vehicle or other asset type.
- You will purchase the asset and you or your business takes full ownership and responsibility for it.
- You will make regular repayments to the lender for a fixed period of time.
- The lender will register a mortgage over the asset (similar to how a property is used to secure a home loan).
In summary...
- Borrow from $5,000 to $1million
- Loan terms from two to five years
- Simple application and approval
- Interest rate tailored to your business
- Lower interest rates than unsecured business loans
- Allows business to claim tax credits
Chattel mortgage benefits
Chattel mortgages in Australia offer different benefits compared to many other kinds of business finance. They can be suitable for most businesses purchasing company vehicles or machinery.
Here are some of the primary benefits:
- Can be used to finance a vehicle if it is used for business purposes 51% of the time.
- Offers GST, depreciation, and tax-deduction benefits on a vehicle.
- Uses the financed vehicle as security (meaning no need to use other assets for this purpose).
- Allows the business to benefit from immediate ownership of the vehicle.
- Option to include a balloon payment to lower monthly repayment costs.
- Choice of loan duration, generally set between 2 and 5 years.
- Chattel mortgage interest rates and fees are generally lower than other forms of vehicle finance.
- Depending on the loan, you may have the flexibility to repay your chattel mortgage early if you can afford extra repayments.
Who is eligible for a chattel mortgage?
- Business owners with an ABN (it's why this kind of finance is sometimes called an ABN loan)
- GST-registered businesses
- Australians citizens and permanent residents
- Applicants who can provide bank statements and other proof of eligibility (otherwise you could apply for a low doc business loan)
- Applicants who meet the lender's minimum credit score requirements
- Businesses that have been operating for at least six months (the longer your business has been operating, the more favourably lenders will view your application)
What assets can I finance with a chattel mortgage?
Chattel mortgages are commonly used to purchase business vehicles such as company cars, utes or trucks. The vehicle can be used partly for personal use, as long business is the primary purpose (i.e. more than 50%).
New and used vehicles are eligible, as long as it’s less than 12 years old (lenders generally favour newer assets).
Chattel mortgages can also be used as a form of equipment finance more or less any asset with a registration number (e.g. office equipment, machinery or kitchen equipment). Lenders generally view specialist assets as being riskier to lend against.
Chattel mortgage fees
Chattel mortgages can come with application and ongoing fees. But not all do. This is why it's important to compare chattel mortgages based on the interest rate and fees.
To give you an idea, the application fee on a chattel mortgage can range from $0 to several hundreds of dollars depending on the lender, the specific loan and the asset you're buying.
There may also be fees if you make extra repayments or repay the chattel mortgage early. But again not all lenders charge these and it can be worth shopping around for lenders that don’t as this will give you the flexibility to repay the loan early if you wish.
Most common vehicles purchased with a chattel mortgage
| Small vehicles | Large vehicles | Machinery |
|---|---|---|
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Chattel mortgage GST credit
If your business is registered for GST, you may be able to claim a credit for any GST paid on the initial purchase price of a business vehicle or other asset financed with a chattel mortgage.
This can be claimed as what’s called an input tax credit on the first Business Activity Statement (BAS) following the establishment of the chattel mortgage.
Other tax benefits of a chattel mortgage
The GST saving is just one of the potential tax advantages available when buying an asset through a chattel mortgage:
- The vehicle becomes an asset on the business’s balance sheet
- You can claim depreciation on the vehicle in your tax return
- All interest paid is tax-deductible (estimate your interest costs using our chattel mortgage calculator)
For depreciation and GST on vehicles, there is a vehicle value limit which is set each year by the Australian Tax Office.
This cost limit on vehicles is $64,741 for both GST and depreciation during the 2022-2023 tax year. The maximum amount of GST claimable during that year is 1/11th of the cost limit — $5,885.
If the vehicle is used for both business and private use, you will need to calculate the breakdown of each for tax purposes, as only the business use portion will be eligible for a deduction or credit.
It’s a good idea to get professional tax advice to understand how these potential benefits could apply to your situation.
Chattel mortgage vehicle price versus claimable GST example
| Chattel mortgage feature | Vehicle One | Vehicle Two |
|---|---|---|
Purchase price | $40,000 | $100,000 |
Claimable GST | $3,636 | $5,885 |
Reason | Vehicle is below the cost limit, and full GST on the purchase price can be claimed. | Vehicle is above the cost limit, and only $5,885 of GST can be claimed. |
Self-employed (sole trader) chattel mortgage
For sole traders, a chattel mortgage can provide significant benefits not available under most other forms of car finance.
As the vehicle is being used largely for business purposes, you may be able to claim some or all of the interest and depreciation costs as tax deductions as well. The main requirements are that you have an ABN and are GST-registered.
Common Australian trades using chattel mortgages
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Deposits and trade-ins for a chattel mortgage
Although you won’t be required to put down a deposit in most cases (lenders will generally finance 100% of the asset price through a chattel mortgage), you usually have the option to pay a deposit to lower your monthly repayments.
If you have an existing vehicle you will be trading in, you can use the trade-in value of your old vehicle to purchase the new vehicle, which will also reduce the repayments.
Chattel mortgage balloon payments
Depending on the lender, you may have the option to include a balloon or ‘residual’ amount as part of your chattel mortgage.
This is a lump-sum repayment due at the end of the loan term and results in lower regular repayments during the loan.
This can be attractive when a business wants to conserve cash flow at the time of taking on the chattel mortgage. However, a balloon payment usually means overall interest costs on a chattel mortgage will be higher.
Chattel mortgage balloon payment example
| Loan amount | Loan term | Balloon amount | Interest rate | Monthly repayments |
|---|---|---|---|---|
$50,000 | 5 years | $0 | 6% | $967 |
$50,000 | 5 years | $20,000 | 6% | $728 |
What happens at the end of a chattel mortgage?
At the end of a chattel mortgage term, you or your business will need to pay the balloon amount — if there is one included — and you will have a few options.
- Trade the vehicle in and purchase another with a new finance agreement, repaying the balloon amount in the process (generally using the proceeds from the trade-in).
- Repay the balloon with funds at hand, and retain or sell the vehicle independently.
- Refinance the balloon amount into a new loan and retain the vehicle.
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Here are the most popular chattel mortgage questions people are asking:
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Where can I get a chattel mortgage?
Chattel mortgages are available through most major banks and some specialist smaller lenders.
You can also get a chattel mortgage with the help of a vehicle finance broker. A broker can help you compare the best available options for chattel mortgage and will assist you with your application. Finance brokers generally operate Australia-wide, including Sydney, Perth, Adelaide, Brisbane, Newcastle, Melbourne, Canberra, or anywhere else in Australia you may be located.
Can I get a chattel mortgage if I have bad credit?
Yes, provided you can demonstrate your ability to repay the loan amount. As a chattel mortgage uses the vehicle you wish to finance as security, lenders are more inclined to offer approval to someone with bad credit than they are an unsecured business loan. If you have issues in your credit history, you could consider a specialist bad credit business lender.
What are the disadvantages of a chattel mortgage?
There are three main disadvantages of a Chattel Mortgage:
- Repayments on the loan amount including the balloon payment are not tax-deductible (only interest costs are),
- It will work out more expensive than paying for an asset using cash, although it can be cheaper compared to other finance types.
- For small businesses in particular, there is specialist accounting expertise required to claim the GST credit and other tax benefits.
What are the terms for a chattel mortgage?
Loan terms for chattel mortgages are often flexible to suit the borrower, though most lenders will offer an agreement between two and five years.
Can I repay a chattel mortgage early?
It’s generally possible to repay a chattel mortgage early if it suits your business to do so. Just bear in mind that some lenders charge early repayment fees.
What can I buy with a chattel mortgage?
Chattel mortgages are often used to finance business vehicles, equipment and other assets. These can be new or used as long as they meet the lenders overall eligibility criteria.
Written by
Loans Expert
Shaun McGowan
Reviewed by
Editor
Sean Callery
